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Dallas Public Employee Pension Wrecks City Credit

Thursday January 19th, 2017   •   Posted by Craig Eyermann at 6:18am PST   •  

26994779_s Last December, the mayor and city council of Dallas, Texas, acted to stop a run on the city’s pension program for police officers and fire fighters, as it became increasingly clear that the fund was rapidly becoming insolvent.

Last week, the city’s elected leaders made their termination of the lump sum withdrawals that retired city police officers and fire fighters had been rushing to make to protect their retirement wealth before the pension fund went bankrupt permanently. Jim Schultze of the Dallas Observer describes the new action:

Whether or not the city can really get away with this new move — browbeating the police and fire pension fund into shutting down lump-sum withdrawals for Dallas cops and firemen — let’s be honest and name it for what it is. This is a default. It’s bankruptcy-lite.

Yesterday, the board of the Dallas Police and Fire Pension Fund blinked and did what the mayor was demanding. The pension board slammed the door shut on retirees who want to take all their money out of a special fund called DROP.

The mayor and the city manager want the board to agree not to open that door again until the pension board has taken a big chunk out of what DROP owes. And guess whose hide that chunk comes out of.

The city wants the pension fund to go back into the DROP fund and retroactively strip out all of the interest and cost of living increases that the pension fund originally promised to pay cops and firemen when they put their money into it in the first place however many years ago.

In finance circles, this kind of action is called a clawback, and it typically occurs only after an individual has been determined to have received excessive benefits or income through accounting errors or through fraud.

But for the city of Dallas, it wasn’t enough to avoid damaging the city’s credit rating. The Dallas Business Journal‘s Jon Prior reports:

Standard & Poor’s has downgraded Dallas’ credit rating over concerns about the struggling police and fire pension.

The city’s general obligation bonds were downgraded to “AA-“ from “AA.”

“The downgrade reflects our view that despite the city’s broad and diverse economy, which continues to grow, stable financial performance, and very strong management practices, expected continued deterioration in the funded status of the city’s police and fire pension system coupled with growing carrying costs for debt, pension, and other post-employment benefit obligations is significant and negatively affects Dallas’ creditworthiness,” S&P Global Ratings credit analyst Andy Hobbs said in a statement.

The police and fire pension system could go insolvent in the next 10 years because of a funding gap. The financial troubles, along with a multi-billion-dollar lawsuit between the city and emergency works, could put Dallas on a path to bankruptcy.

Credit rating agency Moody’s had previously acted to downgrade its assessment of the city’s creditworthiness twice in the last two months of 2016. The lowered credit ratings mean that the city will have to pay higher interest charges on any new money that it borrows, which will increase the cost of sustaining the city’s government to Dallas residents and businesses.

After the city’s credit downgrade, and with the leverage of the clawback, Dallas Police and Fire Pension officials acted late last week to once again permit lump sum withdrawals on more favorable terms to the city. Jon Prior reports again:

Officials of the troubled Dallas Police and Fire pension narrowly approved a plan Thursday to once again allow members to make lump-sum withdrawals that were halted last year if a judge approves the plan.

An estimated funding gap has put the system in danger of insolvency in the coming years, but officials crafted a plan to allow for limited distributions by members that hinges on the financial health of the fund each month. A judge will rule on Jan. 17 whether to approve the board’s plan.

For Dallas’ retired police officers and fire fighters, this last action means that whether they can have access to their retirement wealth will be entirely dependent upon how well the officials of the Dallas Police and Fire Pension fund manage the program. Given their disastrous track record to date, and without more serious reform, the ability of these Dallas city employees to protect their retirements from further clawbacks will likely be very limited.

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January 2017